June 24, 2015
By Owen Pawson and Alizee Bilbey, Miller Thomson
In a disturbing trend, a B.C. municipality is refusing to work with contractors and consultants who have been involved in recent litigation brought against it.
From the June-July 2015 issue, page 37
A contractor, J. Cote & Son Excavating, is suing the City of Burnaby in B.C. because of a new provision in its tender documents. J. Cote calls it a “reprisal clause.”
The clause states that Burnaby will not accept tenders from any party that is, or has been within the last two years, involved in legal proceedings initiated against Burnaby arising out of a contract for works or services. The clause effectively forces consultants or contractors who are currently working for Burnaby who may have a dispute with the city to choose between pursuing their legitimate legal rights and bidding on Burnaby contracts for the next two years.
In its notice of civil claim J. Cote argues that the clause financially punishes contractors for exercising their legal rights. Burnaby has responded that the clause was incorporated and implemented on bona fide policy reasons based on financial, economic, social or political factors or constraints. Burnaby denies the allegation that the clause infringes the rule of law or the right of reasonable access to the courts, because the clause does not preclude anyone from commencing legal proceedings against the city.
J. Cote is precluded from being considered for any tenders issued by Burnaby because of an action the contractor initiated in the Supreme Court of British Columbia in December 2013. That action arose out of a previous contract with Burnaby for the construction of sewers, the installation of service connections and paving. J.Cote has performed contracts for the city totalling $14.8 million since 2005, so being prohibited from tendering is significant for them. But the loss of the opportunity to bid on future public contracts with Burnaby also seriously impacts any firm that routinely performs contract work for the city.
Similar issues have been raised in the past. In Sound Contracting Ltd v City of Nanaimo the B.C. Court of Appeal found that Nanaimo could, based on the “privilege clause” included in its request for tenders, exercise its discretion and bypass the lowest bidder for a project. The Court stated that the previous dealings between the parties provided additional criteria that Nanaimo could consider and that such criteria were “probably the best indicator of how a proposed relationship will come to work out in practice.” However, the Court did state that this discretion should not be exercised to punish or “get even” for past differences.
Hancon Holdings Ltd v Nanaimo (City) is similar to the J. Cote case. At issue was the provision in Nanaimo’s tender documents giving Nanaimo the absolute discretion to reject a tender if the tenderer had been engaged in legal action against Nanaimo in the previous five years. The Court accepted Nanaimo’s evidence that it adopted the provision for valid business reasons, including the rationale of avoiding high legal costs that would be incurred by taxpayers to defend against subsequent legal actions if the contract was awarded to the tenderer.
But these cases can be distinguished from the lawsuit between J. Cote and Burnaby. In both Sound Contracting and Hancon, Nanaimo had the discretion to decide whether to accept or bypass the tender. In the J. Cote case, the clause prohibits, without discretion, any tender from a tenderer who has been involved in legal proceedings against Burnaby in the last two years. The automatic disentitlement distinguishes this case from the others and may cause the clause to fall into the category of “punishment” for past differences — something which the Court in Sound Contracting specifically rejected. It may prove difficult for Burnaby to demonstrate that past legal proceedings, no matter how reasonable, warrant automatic disqualification.
The Association of Consulting Engineering Companies-Canada (ACEC) has released a member advisory opposing the practice by any municipality or public agency of prohibiting a firm from participating in the procurement process because the firm has past or current litigation with that municipality. In the advisory, ACEC stated that such a sanction effectively discourages firms or contractors from pursuing their legitimate legal rights, based on a threat of being barred from future participation in projects.
If J. Cote is unsuccessful and the clause remains in Burnaby’s tender documents, consultants and contractors who are currently working for Burnaby will be obliged to choose between pursuing legitimate legal claims arising from their contract with the municipality and obtaining future contracts. For any firm reliant on public sector projects, the economic consequence of such a choice could be significant.
Nanaimo continues to include a “litigation clause” in its request for tenders that specifies that Nanaimo may, at its absolute discretion, reject a bid submitted by a company if it has been involved in a legal action against Nanaimo in the previous five years. Even if the Court in J. Cote recognizes the distinction between Nanaimo’s discretionary litigation clause and Burnaby’s automatic disqualification clause, and J. Cote is successful in its case, Burnaby may simply add a discretionary element to its clause.
Municipalities and cities should carefully consider the implications of such clauses, discretionary or not. The reputation of a contracting authority is very important given the small, well connected design professionals and construction contractors who bid on such projects. When the economy is robust, bidders may decline to participate in tenders with onerous clauses. This is especially true of good firms that are most likely to have other opportunities that do not require them to give up their legitimate legal recourses. cce
Owen Pawson is a partner with Miller Thomson, LLP in Vancouver. Alizee Bilbey is an articled student with the firm. E-mail email@example.com